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St. Louis Fed’s Musalem backs gradual 25 bps hikes even if markets react

Musalem said keeping policy unchanged risks inflation staying above the Fed’s 2% target over the next year.

Reported · Written up by our desk · Central Banks

St. Louis Fed President Alberto Musalem said he would have preferred a gradual 25 basis point rate increase at last week’s FOMC meeting rather than holding steady, arguing that incremental moves are less disruptive and less costly than potentially sharper tightening later, according to Action Forex.

Speaking in Brazil on Thursday, Musalem said inflation is likely to remain too high relative to the Fed’s 2% goal over the coming year if policy is unchanged, and he warned that tolerating higher inflation could leave “fertile ground” for inflation expectations to become unanchored.

He also pushed back on the idea that the Fed should delay action because markets may not be positioned for higher rates, saying policymakers should follow their economic assessment even if it differs from what is already priced.

With financial conditions supportive and the labor market showing solid payroll growth, Musalem argued there is room to tighten before inflation becomes harder to contain, adding to hawkish pressure as investors have shifted toward pricing a September hold amid falling oil prices and optimism around reopening the Strait of Hormuz.

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